Borrowers struggling with private student loans would benefit from more refinancing options, a U.S. consumer protection official told a Senate panel today.
Congress should focus more attention on expanding modification and refinancing options in the private market, Rohit Chopra, student loan ombudsman for the Consumer Financial Protection Bureau, told a Senate Banking subcommittee hearing. The country’s mounting student loan debt threatens to “act as a drag on economic recovery,” he said.
“Policy makers have paid significant attention to the conditions in the mortgage market, but given the potential impact of student debt on the broader economy, the situation demonstrates the need for attention,” Chopra said.
The panel, headed by Senator Sherrod Brown, an Ohio Democrat, held its hearing less than a week after publication of a government report that said students were victims of a “subprime-style” private loan market that contracted after the 2008 credit crisis.
The report, written by the consumer bureau and Education Department, recommends that Congress clarify the definition of private loans and require schools to certify the products.
Congress should also consider changing a bankruptcy procedure law enacted in 2005 that prevents private student loans from being discharged, the report said.
U.S. agencies have intervened in the private student loan market in recent years, according to a footnote in Chopra’s written testimony. Citing “unusual and exigent circumstances,” the Federal Reserve Board of Governors exercised its authority to establish the Term Asset-Backed Securities Loan Facility, which facilitated the issuance of a wide range of such securities, including those backed by private student loans.
Jack Remondi, president and chief operating officer of Newark, Delaware-based SLM Corp., the education lender known as Sallie Mae, said the company will conditionally support some of the government’s recommendations.
“Sallie Mae supports bankruptcy reform that would require a period of good-faith payments, that is prospective so as not to rewrite existing contracts, and that applies to federal and non-federal education loans alike,” Remondi said.
Congress should consider allowing lenders to rehabilitate defaulted private loans and by removing defaults from the records of customers who have resumed making timely repayments, a practice required by law for federal borrowers but not allowed for private loan recipients, Remondi said.
Senator Richard Durbin, an Illinois Democrat, has introduced two bills on private student loans, one reversing the bankruptcy discharge law and another with Senator Tom Harkin, an Iowa Democrat, that would require colleges to counsel students to take out the maximum in federal loans before venturing into the private market.
The bills are “going nowhere,” Durbin said in a interview yesterday at a meeting of the National Association of Student Financial Aid Administrators in Chicago.
Outstanding educational debt taken out by students and their parents is about $1 trillion, according to the consumer agency. About 15 percent of the loans are privately originated, and don’t have federal loan protections such as fixed rates, deferment and income based repayment.
Consumer-advocacy groups support the consumer bureau and Education Department recommendations, according to witnesses Deanne Loonin, an attorney for the National Consumer Law Center who directs its Student Loan Borrower Assistance Project, and Jennifer Mishory, deputy director of Young Invincibles, a Washington-based group that describes itself as “a national organization committed to mobilizing and expanding opportunities for young Americans.”